Ask
an expert: What is PITI?
Q: In many mortgage articles I see references made to
"PITI." Could you please explain what this is?
A: PITI is an acronym lenders use to describe the
different components that make up your monthly mortgage payment.
It stands for: principal, interest, taxes and insurance.
Principal: This is the actual amount of your loan. A
portion of the principal is usually paid off with each mortgage
payment thereby gradually reducing the outstanding balance you
owe and increasing your home equity (the portion of the home you
own). The principal component of each payment is typically very
small in the first few months, but increases during the life of
the mortgage as the mortgage balance drops. Some types of loans
do not have principal payments, including interest-only
mortgage, which does not include any principal repayment in the
monthly calculation.
Interest: The interest is the amount a lender charges
you for borrowing the money to buy the home. It consists of a
percentage of the outstanding principal. Initially, the largest
part of your mortgage payment goes toward paying off the
interest. However, as time goes by and you begin to pay off your
mortgage, more of your monthly payment goes toward paying down
the principal and less toward paying off the interest. Your
mortgage rate can change periodically if you have an
adjustable-rate mortgage. It can also change if you renegotiate
your mortgage or make a lump payment to lower the principal.
Taxes: Many homeowners also pay their real estate
taxes as part of their mortgage payment. The lender passes these
on to the local municipality to pay for community schools,
roads, police and other municipal services. Taxes can be a
significant part of your total mortgage payment, and tax rates
can vary significantly from area to area. So it’s wise to find
out the local tax rate before you purchase a home.
Insurance: The fourth component of your payment is
homeowner’s insurance, which may be collected by your lender
and paid to your insurance company. Typical homeowner’s
insurance protects your home and property against fire or other
damage. You may need supplemental coverage for other risks. For
example, you may need flood insurance if your home is in an area
with a high risk of flooding. If you buy your home with less
than a 20 percent down payment, you may also be required to have
private mortgage insurance (PMI) to protect the lender from
default.
To calculate your total PITI:
- Enter your current mortgage balance and the term or
amortization period of your mortgage into the Homeloan2u
Mortgage Calculator to help you calculate the principal and
interest components of your monthly payment.
- To calculate your property taxes, divide the assessed
value of your home by 100 and multiply by the tax rate. For
example, for a $100,000 home in an area with a tax rate of
2.40, you would divide $100,000 by 100 (= $1,000) and
multiply by 2.40. Your annual taxes would be $2,400.
Dividing by 12 gives you the monthly installment: $200.
(Some municipalities have a tax structure that requires a
home’s value be divided by 1,000 ? you can check this
with your local tax office.)
- To calculate your monthly insurance payments, divide your
total yearly premiums by 12.
The combined sum of the above will equal your total PITI:
| Principal and interest: |
| + Property taxes: |
| + Insurance: |
| = Total PITI: |
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